OCBC Investment Research 2015-07-01: OUE Commercial REIT - Rights issue for acquisition of One Raffles Place. Downgrade to HOLD with S$0.84 FV

OUE Commercial REIT (OUECT) has announced an underwritten renounceable rights issue to acquire an indirect interest in One Raffles Place (ORP) from its sponsor OUE Limited.
Nine rights units for every 20 existing units will be issued at a price of S$0.555 per unit with an ex-date of 3 Jul 2015.
The total cost of the acquisition will be S$1,062.2m - S$1,178.3m; ~S$218.3m raised from the rights issue, together with a debt drawdown of S$333.3m - S$399.3m and S$500m - S$550m of convertible perpetual preference units (CPPUs) issued to the sponsor, will be utilized to acquire an indirect interest of 75.0% - 83.33% in OUE Centre Limited which in turn owns 81.54% of the beneficial interest in ORP.
After the transaction, OUECT will have an effective stake of 61.16% to 67.95% in ORP.

The cost of the debt facility is ~1.8% with tenure of three years. The CPPUs will have a coupon of 1.0% and a conversion price of S$0.841 per unit, representing a 15.0% premium to the theoretical ex-rights price of S$0.731 per unit. There will be a restriction period of four years, and only 1/3 of the CPPUs initially issued can be converted each year after the restriction period.
We understand that the NPI yield of ORP is marginally below 3.5% and the acquisition is not expected to be yield-accretive at the onset.
That said, there is ample scope for operational improvement and the acquisition is expected to be yield-neutral or better as OUECT improves the occupancy rate to the mid-90% levels from current mid-80%, and passing rents to S$10.20 - S$10.50 from current levels slightly below S$10.
Given the dilutive impact to DPU over FY15-17 in our model, our fair value estimate slips to S$0.84 from S$0.88 previously and our rating is downgraded to HOLD on valuation grounds.

(Eli Lee)

Source: http://www.ocbcresearch.com/

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